Channel 4 was holding talks with Channel Five when Luke Johnson joined C4 five years ago. Now the wheel has come full circle for the state-owned, ad-funded company, with the chairman himself holding talks with RTL, the German owners of Five, over the past few weeks. So what exactly has changed?

When it comes to C4's opposition to such a deal, it seems very little. Although Johnson, a private financier, says he initiated discussions with Gerhard Zeiler, he believes the economics of a merger are even worse than they were five years ago - and that it would be a "tragedy" if it took place. "It would, to a fair degree, make my tenure as chairman a failure," he says. "I set out to make Channel 4 better, to leave it in a better state than I found it. [A merger] would denude our culture and shrink the variety of voices you get to hear or see on air."

What has changed in the past five years is C4's own perception, along with many in the industry, that it cannot survive in its current state and needs financial or structural support if it is to survive and prosper. Set up as a publicly owned but self-funded company, it is the broadcasting industry's Royal Mail - subject to the vagaries of the commercial world and the politics of Westminster.

Both Johnson and the chief executive he appointed, Andy Duncan, have, in the past two years, made pleas for some kind of indirect state aid. If C4 is to continue to broadcast public service television once the analogue system is switched off in 2012, they say, it could face a shortfall of as much as £150m a year. Recently these pleas have focused on a tie-up with the BBC's commercial arm, Worldwide.

Left to its own devices

The situation has been given greater urgency with last year's arrival of a government minister, Lord Carter, who is keen to overhaul the media and communications sector and to broaden out the debate from whether or not to top-slice the licence fee. His Digital Britain report, a draft of which is to be published a week today, is expected to call for support for broadband infrastructure while ruling out direct state aid for C4. The fact that an early draft report, leaked last week, was immediately seen in terms of what it meant for the licence fee (and C4 won't be getting it) is unlikely to have pleased Carter.

On Wednesday, the media regulator Ofcom will publish the second part of its public service broadcasting review - in which it could either decide to back C4's plea for public funding or leave it to its own devices and the clutches of a corporate suitor. Any dramatic change is likely to need government backing and could even prompt complaints under European competition laws.

Johnson rubbished this suggestion last week: "There has been more state aid given out in the last 12 months than in the previous 12 years combined." C4's argument is that if the government can part-nationalise banks and airlines it can help a broadcaster it already owns - but that is not a view shared by many in the industry.

A private financier, Johnson has always been an unlikely public servant - he admits to being "more comfortable" with organisations he can own. Yet his support for "everything that is great and different" about C4, which includes its state ownership, appears genuine.

So why did he initiate a high-level meeting with Zeiler just after Christmas? Because Carter and the "powers that be" that are about to pronounce on the future of PSB wanted him to. "As a steward of taxpayer assets and ultimately as a servant of political masters and our regulator, we have to do what we're bid," says Johnson in an interview in the offices of his venture capital firm, Risk Capital Partners.

Carter's encouragement could appear to be part of a government plot to sell off C4 - Treasury advisers are thought to be valuing the business. Yet Carter is understood to be keen to open up the debate with ideas as diverse as inviting a range of shareholders to take a stake in Channel 4, or even some sort of rights-sharing joint venture with BBC Worldwide a possibility. The latter could help C4, which owns none of its broadcast content.

Channel 4 has worked hard to present a positive front. Johnson, appointed by Carter when he was head of Ofcom, says: "We don't think it [a merger with Five] makes sense and ultimately I don't think it's [an option] that Ofcom or indeed Carter [will] recommend as a permanent, substantial answer to the funding deficit we face for public service broadcasting."

'Frankenstein' deal

He is less confident that they will back his and C4's "preferred option" - a deal with BBC Worldwide that would allow the broadcaster to remain independent of direct state aid. "Our preference is not to receive direct cash. Channel 4 has always avoided that. The possibility of some structural solution with BBC Worldwide has its attractions."

Those attractions are obvious - access to public money through a profit-making enterprise kept at arms' length from the corporation. Licence-fee money without too much scrutiny or the need to kowtow to politicians too much? Bingo! Such a suggestion has infuriated the BBC, prompting a furious lobbying campaign on both sides, with BBC insiders calling it a "Frankenstein" deal.

Confidential talks "exploring possibilities" with Worldwide appear to have broken down - with Johnson more or less admitting that they may need government intervention to succeed. "Clearly the BBC doesn't want to sacrifice any licence fee or any assets ... Frankly, the idea that they are the only recipients ever of that huge intervention, £3.5bn, seems to me illogical. You would not set up the system that way today. It just doesn't make sense."

He calls the BBC a "phenomenal lobbying machine" and was less than impressed by suggestions made by Mark Thompson, the corporation's director general, that C4 should return to merger talks with Five. "He is a very clever politician and perhaps he'll go into politics," says Johnson, who admits that it's "the politics of the job that have been the most frustrating".

Johnson is particularly cross about the suggestion that C4 should put its own house in order by cutting costs further - critics have argued that the broadcaster's 150 job cuts were too little, too late. "The BBC lives in a parallel universe, they don't know what the real world is about," he says, his voice rising. "They are unbelievably insulated. It's outrageous for them to say we're not efficient enough."

What of Channel 4's executive bonuses? Duncan took home £1.2m in 2007. "They were at a time and place when they were felt necessary," says Johnson, refusing to say whether Duncan will get another "loyalty" bonus next year.

In a board frequently called "dysfunctional" by others in the industry, Johnson's relationship with Duncan is believed to be difficult. "It's important that chairman and CEO are not best mates," says Johnson, laughing. "However, I get on with him very well. It's a constructive, helpful relationship." He calls industry speculation that he will look for a new chief executive this year "complete nonsense".

However, it is perhaps significant that Duncan appears to have played little part in the merger discussions.

Divisions within the board emerged most clearly during last autumn's decision to pull out of DAB radio after C4 had invested much time and money in it. Johnson says: "It was a unanimous board decision ... because we couldn't afford it."

As he enters his last year as chairman - "supping at the top table", as he puts it - he remains a bit of an outsider. "I have one foot in the camp now, but you couldn't call me a lifer, a TV broadcaster." Perhaps showing a lack of political nous at a time of job cuts, he offers this view of his tenure: "My one advantage is that I don't have a livelihood to worry about so I can be open-minded. I can look for the right option."

With the final Digital Britain report due in May, C4 is likely to take up more of his time in the next few months, despite his need to focus on a private business hit by the economic downturn. Having accepted a part-time role as chairman of the Royal Society of Arts in March, he is refusing to look too far beyond Channel 4. "I hope the endgame is in sight ... We're not complacent and not smug at all. This has been an uphill battle and there are many skirmishes yet to be fought. But we travel optimistically."

So would he resign if Ofcom and Carter end up recommending the dreaded privatisation of Channel 4? "I'm not going to think about that and I don't think they'll say that. No."